AIPIS 245 - How the Blockchain Can Make Buying Real Estate Cheaper with Propy's Natalia Karayaneva

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It's my pleasure to welcome Natalia Karaeneva. She is the CEO and founder of Propy. And there are a lot of interesting applications and a lot of talk certainly about cryptocurrencies and the blockchain technology behind them. And today we are going to dive in and talk about how this applies to the world of real estate where recordings and records are very critical to private property rights. Natalia, welcome. How are you?

Thank you. Hello everyone. I'm really great. I hope you're as well.

It's good to have you. We love your accent and you're coming to us today from Menlo Park, California, but grew up in Russia and Bulgaria, so it's great to have you. Tell us, how can blockchain be used used in the real estate world?

Blockchain could be used in this industry in variety of use cases. These are transactions, facilitation, mortgage facilitation, lease facilitation, disputes, automation, everything what concerns sharing, economies, Airbnb also the middleman could be easily displaced by the blockchain technology.

So right now, I mean, are we just talking, Natalia, about the concept of recording when it comes to real estate? In the US of course it varies by country, but in the US it's a fairly simple process, I guess. You know, someone acquires a piece of property and it's recorded at the county recorder's office with a deed. That's the instrument, right? And you know, deeds go by various names and the various types of deeds. But you know, everyone can just find out who owns the property by looking, looking at the public record. What needs to change and what would blockchain do?

Well, frankly speaking, the process seems to be simple for those who live in the states and got used to the process. But when you dip in and see that there are 18 middlemen involved into closing a transaction, it shows that the process is too complicated. And when foreign buyers are acquiring properties here, they have to fill face with many difficulties and differences between the local system and the system that exists in their own countries. And there are many Fraud cases even in the US for fairly big numbers of funds. So the entire process is not efficient. Unfortunately, there are fraud cases with title companies, with recording offices. The title insurance company industry is 10 more than $10 billion and there is only 6% ratio of loss on premiums.

I'm, I'm glad, I'm glad you mentioned that. Let me interject here if I may, Natalia. Title insurance is one of the most ridiculous forms of insurance. What a racket that has got to be. I mean they charge huge fees. When I owned my real estate company in Southern California and we would sell high end properties, I mean the title insurance fees on these properties were enormous. And in my many years of doing that, I never heard of a title claim, at least not one that I can ever remember. There may have been some inkling of something, but I certainly don't remember anything offhand. And you know, if you, if you ask the title people, if you criticize them about this, and of course they were you know, out basically giving kickbacks to all the real estate people to refer them business and so forth. And, and, and here's the thing, you know, you get the government involved and everything becomes a big scam because the government would regulate the title insurance rates and basically say, well, you have to charge this much and you know, they would have to submit their fee schedules to the department of insurance in you know, the various states. And, and they had so much mass, they had massive amounts of money left over that they would engage in all these illegal practices. Or back in that day it wasn't, they weren't quite as illegal, they weren't quite as black and white as they are today where they would just buy business because it was so lucrative and they had all this money sitting around and then basically they would get the states to sanction these high rates that they were charging. And when you would criticize them they would say, well the reason we don't have many claims is because we do such good research in advance that we prevent title claims claims. You know, and what they mean, there is doing a title search to make sure that there's no other claim on that property when it's transferred. But really a pretty ridiculous business. So feel free to comment on that.

Yeah. And as soon as the records are public in the states, it seems ridiculous that today we still need manual labor to make this title search. I think it's the right time when technology can handle that. And we are seeing a lot of problems with recording offices. There are 3,000 county offices that have to maintain those Public records. Every clerk has this headache with which database to choose, which software company to choose. And instead PROPI is developing decentralized registry on blockchain that could be used by those clerks with no additional expense for changing the current databases. And so in the US we're soon announcing several pilots with those clerks in different states to prove the concept. And we do believe that if the system has standards and if there is available platform for the electronic transfer and recording of real estate on blockchain, then the clerks and the counties will have less headache. And then with the time, the title insurance probably will disappear or at least the title insurance probably will be cheaper for the users. We see that in the other countries title insurance could not be adopted. And as soon as their systems are efficient and government guaranteed, there is no need of such a tool.

Yeah, yeah. It would be nice to see the transaction cost and speed for real estate deals reduced because it would make the market more liquid. It would, you know, reduce friction on transactions. There would be more transactions, everybody would be paying less to middlemen as we talked about. But comparatively speaking, the US is a pretty transparent market and it's actually relatively inexpensive to transfer real estate in the US comparatively. Now I know there's a lot of countries to compare it to, but you know, if you're doing deals in I, I would see that foreign countries need this more than the US does. Would you agree with that? I mean, of it depends what country. You can't paint a broad brush like that.

Our team and myself, we have experience in several countries like United Arab Emirates, uk, European Union countries, post Soviet Union countries. So what we witness is that the commissions of brokers are at least twice, sometimes even five times less in other countries than in the U.S. and then it depends on the country. Sometimes there are laws, lawyers, fees that are pretty high, but the transfer itself, and especially when there is no need of title insurance is pretty inexpensive.

Yeah, you know, and, and that's an interesting probably for another day in another show to talk about broker commissions, which I think are very high. And I'm probably the only one in the real estate business that actually says or admits that. I think they're kind of ridiculous, frankly. And I've always thought that, you know, even in my many years in the good old fashioned resale real estate business, traditional estate business. But part of the reason we have that is we have again this perverse marketplace where of course the government gets involved and they do licensure, but they make it really easy to get a license and hard to lose a License. So the license really isn't that valuable, honestly. But you do have to have it, right? It's a slight barrier to entry. But there's so many people that come into the business because of these exorbitantly high commissions. And so what you see is this perverse issue where all of the brokers. But this is true in many industries. I want to have everybody understand this is not just the brokerage industry by any means. It's true in many, many industries where instead of. You know, there's an old saying by the late Stephen Covey that I really like and the quote is the main thing is to keep the main thing. The main thing, okay, the main thing is to keep the main thing. The main thing. And in real estate we have moved so far away from the main thing of being good at your craft, right? It being good at brokering deals. Now you got to spend all your time doing marketing because the stakes are so high. In other words, the commissions are so high. You know, you sell a three million dollar home anywhere in the socialist Republic of California and you know, that's a 90 to $180,000 commission check. It's insane, you know. And so the brokers now have funneled all of their time, energy and especially money into the marketing business rather than being actually good at their craft. Now this is true obviously in the legal profession, it's true in many industries, but it's really perverse. It shouldn't be that way. If you ask me, it should be, you know, if there was a more balanced market where people had, I'll call them real jobs where they were actually making widgets instead of selling real estate to each other, which is not really, shouldn't be part of the GDP necessarily, but it's just the way it is. I don't know. So there's so many people out there, everybody has to find something to do, you know.

Yeah, I totally agree. There are millions of licenses brokers in the US and of course those high commissions attracting new brokers. And we never know before we interact which broker has a real passion for the profession or they're just attracted by those high commissions. We do believe though that with the evolving of the technology, the commissions will start decreasing. With propy or without propy, it will just happen because technology will be the one that will close the transactions. And of course brokers will remain here in the industry to help the buyers to navigate, to understand better neighborhoods, neighbors. Everything that is subjective to a property will be transferred as an information by broker and propy as A company has the goal to empower brokers to help them to access foreign buyers, crypto buyers, new channels of revenue. Propy is here to help to close transactions faster with just several clicks on their phones. So I wouldn't say that the broker industry will be disrupted, but it will be influenced heavily.

Right, but really first what your company is going to impact is just the closing cost cost part of the industry, not the broker commission directly. But the more more the title insurance is really that's your competitor, right?

I wouldn't say right now that the title company is our competitor. We are actually working with several title companies and they are participating in our closing procedures right now. So they log in into our system and fill in the information that we need. So the same seller still has to go to the title company to sign the agreement. It's again not the agreement but closing documents. It again depends on a state. But in many states due to regulatory environment we have to use title companies. But when we talk about title insurance, it's not obligatory right now for our customers because we target cash buyers and so for cash buyers and it's not obligatory. So the title companies are mostly helping us in the beginning with title search and closing documents.

Yeah, interesting. Okay, so take us through the steps of how it works. Just quickly just tell us exactly what happens here. So someone buys a property and someone is selling a property, what do they do?

So imagine like Zillow, you go at propy and browse for properties. It could be a Chinese buyer looking for a property in native Chinese language. And once they identify a property, let's say in California, in San Francisco, then they click several buttons so they first can communicate with the broker with our messenger or they just start the transaction. After they initiate the transaction, the the broker will invite the seller to the system. The title company will be invited to the system as well. Once all the parties accepted the invitation, the system sends the purchase agreement to all parties. Then they sign this purchase agreement electronically at propy platform. At this point, the smart contract notifies all the parties that the signatures are received.

And the smart contract is really part of blockchain?

Yeah, that's correct. So every step is recorded on blockchain and is supervised by this smart contract. And once we have the purchase agreement signed, the payment instruction are being sent to the buyer and the buyer is doing the payment again. Every step is recorded on blockchain. For now we're doing crypto payment, but the network step will be payment in dollars as well. And here we work with money transmitter. Once the payment is executed. The seller will be invited to the title company office to sign the agreement. Then the title company notifies the system that the signature is there and will upload the document into our system. Then we issue a title deed where there is a hash of this general smart contract. Then this title deed will be recorded normally at the local recording office. If we don't have a collaboration with them, if it is integrated, then PRAPI will electronically submit this title deed.

Okay, so let me stop and ask a question if I may. So why do they need to go to your website and buy only a property on your site? Can't they just buy any property use this system or no. Like I was kind of surprised you talked about buying properties on your website and then you also talked about going to a title office. Like what are they doing there? Isn't that what we're trying to avoid.

Or no, yeah, we're trying to avoid it. But as of now, in order to meet all the legal applications ultimately leave that. Yeah, they have to go, let's say in, in Florida they will need to go to a notary so they we can avoid title company there. But in California they will have to go to title company put signature there.

Yeah, interesting.

As of now, but we're working with several states and we're helping to write to give our input into the new laws regarding smart contracts and real estate to improve the industry.

Okay, good stuff. So how do you make money?

Good question. So first of all, we charge very small commission, 0.2% from brokers from those high commissions that they receive if we find a deal for them. So if they will close transaction, then we charge a small commission. Then when the transaction is done and when there is a record on our blockchain that the ownership transfer happened, then there is a fee being paid in propy tokens, which is a relatively small fee. Depending on a case, it could be between one to ten dollars.

Okay, interesting. I'm sort of puzzled as to the like you're also in the property business, it sounds like where you're basically helping broker these properties. Like you're referring deals to brokers and people are finding properties on your website as well. Are those just properties you're scraping off the MLS or Zillow or something? Or are they listed with you both?

So we are having listings from MLs and we are also seeing a lot of brokers to list their properties directly with us, especially those that aim to transact in bitcoins or ether. They just list properties with us and we are receiving hundreds of listings every week. So it's both.

Right, right. Good stuff. So what is the future of this? Just wrap it up for us, if you would, and of course give out your website.

Our website is propy.com and again, just to elaborate a little bit, we are developing a marketplace, a global marketplace in several languages where people could search for properties and do payment for properties. And then there is decentralized talking economy for real estate where properties could be recorded and transferred entirely on blockchain. And we're trying to build a government agnostic system that will help government to see the ownership transfer transparently to get better tax collection and so on. So many governments, especially in developing countries, are willing to adopt these blockchain registry and just to get information from there rather than control this registry.

Isn't that amazing? You know, governments need to hire innovative entrepreneurs such as yourself to set up the systems for them. It'll be so much better. So I can really see a huge demand in developing countries for your kind of system. And. And you know, we'll also be interesting to see if it gets adopted in the US as well. I mean, the system we have now is extremely slow. They still send out paper deeds. It's just mind boggling. It's also mind boggling to me that we actually still use checks for anything. And you know the other mind boggling thing, Natalia, Keys. Why are we using keys? It's 2018. I don't know why I have keys in my pocket. It's shocking. But whatever. Leave it to an innovator like yourself to come up with better solutions. So good. Thank you so much for joining us. Did we cover everything?

Yeah, I believe so. Thank you so much for interesting discussion.

All right, Happy investing.

Thank you.

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